In this post:

  • What Are Financial Personality Tests?
  • The Shortcomings Of Financial Personality Test Questions
  • A More Scientific Way Forward

What Are Financial Personality Tests?

Many banks and wealth management firms use financial personality tests as a light way to engage prospective clients through self-discovery. Similar to the famous Myers-Briggs test, they ask a series of questions about your attitude and tendencies, only in a financial context. At the end of the test, you are presented with a moniker for your financial personality, like Confident Money Manager or Balanced Investor, and a description of what that entails. Who doesn’t like to see what personality type they are?

The key problem with these tests is that they are more art than science. If you’re like us, you come away from them thinking “Well, that was about 60% on-target…but in these 3 areas, it didn’t feel like me at all…”. Much as you’d feel after reading a horoscope.

I don’t believe in astrology; I’m a Sagittarius and we’re skeptical.”
-Arthur C Clark

Moreover, where it might once have been true that creating engaging prospect experiences like this necessitated a heavy dose of art (at the expense of scientific or quantitative rigor), that compromise is no longer needed. Advances in decision science, human-centered-design, and gamification now allow wealth managers to create highly engaging experiences that are every bit as engaging as personality tests (even more so, as they are shorter!), AND that reveal a prospective client’s financial preferences with scientific rigor. But more on that later…

The Shortcomings Of Financial Personality Test Questions

First, let’s begin by taking a look at the shortcomings of questions and answers that underpin most financial personality tests. We’ve reviewed numerous financial personality tests[i] – generally, each has 10 – 20 questions. The majority of questions have serious design flaws, which fall into one (or several) of the following categories:

  • Cognitively Taxing
  • Ambiguous Terms
  • Social-Desirability Bias
  • Multi-Dimensional Answer Scales
  • Stated Preferences

Let’s look at examples of each:

Cognitively Taxing – questions that require participants to make mental leaps, causing the question to be confusing and frustrating to answer.

Question – If investing was like driving a car, which of the following would you consider:

  1. How the engine works
  2. Safety
  3. How smooth the ride is
  4. The brand of the car
  5. Getting from point A to B

Comparing investing to driving a car is not an intuitive metaphor. It forces the investor to extrapolate parallels between the answers offered – like How the Engine Works to Portfolio Construction or Safety to Risk Attitude – which are not immediately apparent and require some mental gymnastics to arrive at. It’s also an overly simplistic metaphor, in that investing involves a whole series of variables that driving a car does not, such as a person’s goals, time preferences and social preferences, which all factor into creating a financial plan for someone.

Ambiguous Terms – questions framed with broad terms that will be subjectively interpreted in different ways

Question – When making a large purchase, you prefer to make it:

  1. Always in the spur of the moment
  2. Mostly in the spur of the moment
  3. Sometimes in the spur of the moment
  4. Sometimes after careful consideration
  5. Mostly after careful consideration
  6. Always after careful consideration

The first issue with this question is the lack of situational context surrounding the word large. What exactly constitutes a large purchase? Does a large purchase mean buying a house, a car, a piece of artwork, an expensive piece of jewelry? It’s highly subjective – even two people of equivalent financial means are likely to have different definitions of “large”.

The answer terms are vague too. The gap between sometimes and mostly varies from person to person, as does the definition of careful consideration. Does careful consideration mean taking minutes, hours, days, weeks to decide whether you make the purchase? Does it mean that you have factored the large purchase into your monthly budget and done the math to see if you can afford it? The ambiguity inherent in the framing and answer choices of this question begs more questions than it answers. For more discerning clients, it can undermine the credibility of the entire experience.

Social-Desirability Biasquestions that bias survey respondents to answer questions in a manner that will be viewed favorably by others

Question – In the past year, have you refused to buy a product or service because of reasons that are:

  1. Environmental
  2. Ethical
  3. Social
  4. None of the above

The purpose of this question is to gauge your interest in ESG investing, which is a fantastic and important topic to discuss with clients! However, the framing of this question is biased towards making the person answer yes to at least one or several of options A – C. No one wants to select D as their answer. To openly state that you never consider the environmental, ethical, and social ramifications of your purchasing decisions would be taboo. This question compels you to conjure at least one instance where your core values influenced the products or brands you purchased.

In addition, it does not consider the degree to which you consider ESG in you purchasing habits. It cannot calculate ‘how much’ you care about certain causes. Two people can both say that they care about the environment when making purchases. However, when Person A says she cares about the environment, it means that she bought a bicycle for her commute to work instead of a car, while Person B drives a gas guzzling SUV but chose to buy a refillable water bottle instead of cases of single-use plastic bottles. The above question fails to capture the gradients between people’s ESG preferences.

Multi-Dimensional Answer Scales – questions that frame two different qualities as mutually exclusive, while organizing them on a scale that implies gradients between them.

Question – In relation to your money management, you would:

  1. Always want to be called generous
  2. Mostly want to be called generous
  3. Sometimes want to be called generous
  4. Sometimes want to be called savvy
  5. Mostly want to be called savvy
  6. Always want to be called savvy

The answer scale of sometimes < mostly < always implies that the choice between being called generous or savvy are two dimensions on the same answer scale. However, generosity and savviness aren’t mutually exclusive.

The framing of this question also indicates that there are degrees of difference between the options. The answer scale suggests that options C and D are closer in relation than options A and F, which is not the case.

Stated Preferences – questions that require respondents to accurately state their preferences

Question – The market can often be volatile. What annual fluctuations can you stomach?

  1. Up to 20%
  2. Up to 30%
  3. Up to 40%
  4. Greater than 40%

This question is common in many risk-tolerance-questionnaires. It requires participants to be highly self-aware, well-versed in financial terms (do everyday investors really appreciate what “annual fluctuations” mean?) and an almost superhuman ability to project how one would react in extreme situations. Decades of behavioral economics tell us individuals aren’t very good at stating their preferences on questions like this. From our own studies, we’ve found that when you ask investors to state what investment risk qu